The Global Economy’s Secret Engine: Middle Market Trade Finance

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Abstract

Trade finance, defined as short-term financing to facilitate the movement of goods, is a $17.7 trillion industry, with world merchandise trade volumes historically growing around 1.5 times faster than world real gross domestic product (“GDP”).1 The industry offers large investment potential with an estimated $1.5 trillion funding gap,2 and trade finance exhibits attractive characteristics such as U.S. dollar-denominated transactions, non-correlation, strong collateralization, and extremely low default rates, along with other risk mitigants. Middle market companies, also known as Small and Medium Enterprises (“SMEs”), are vital players in the sector, accounting for 40 percent of exports from Organisation for Economic Co-operation and Development (OECD) countries, and a somewhat smaller share in developing countries worldwide.3 The trade finance gap affects SMEs disproportionately,4 which creates potential for attractive risk-adjusted returns from trade financing to SMEs in select high-growth economies with stable political environments and reliable legal systems.

 

1World Trade Organization. World Trade Statistical Review, 2018. 2Asian Development Bank. ADB. 3OECD, http://www.oecd.org/std/its/trade-by-enterprise-characteristics.htm 4World Trade Organization”. Trade Finance and SMEs, 2016.